A stock you can go nuts on

In a market where almost every stock looks overvalued, this small nut company may prove the exception.

Nuts!

I have to confess I am a bit nuts about nuts.

No cashew is safe within my vicinity. I’m a predator for pistachios. Even as a child I could drain one of those jars of Planters’ dry roasted peanuts in one sitting. Until a few years ago, a local delicatessen used to serve these delicious, big fat almonds, but the owner retired, the shop closed, and I have never seen them since.

I cannot be alone. Prices have boomed in recent years, helped both by healthier eating here and by more demand from places like China. Peanut prices have risen by about a third in the past year.

It’s not a bad idea to invest where we shop -- at the very least, we have some chance of getting some of our money back. And there is, sort of, a nut sector on the stock market (not to be confused with nutty sectors on the stock market, of which there are, of course, many).

Planters is owned by the huge food company Kraft
US:KFT
, but it only accounts for a small percentage of sales. Emerald nuts are owned by Diamond Foods
US:DMND
, another broadly based food company. Private-label food company Ralcorp
US:RAH
is big in the nut business. Macadamia Nut Orchards
US:NNUT
is a $30 million microcap growing and farming those expensive nuts in Hawaii. I’d love to be in the macadamia business. Have you seen the prices?

But the nut stock that intrigues me most is John B. Sanfilippo & Sons
JBSS, -0.52%
, a family-controlled company based in Elgin, Ill., that processes and markets peanuts, cashews, almonds and other nuts. It’s been around since 1922.

It owns the Fisher Nuts and Orchard Valley brands and produces private-label nuts for a lot of big retailers, including Wal-Mart.

In the past five years, sales have risen 29% to $700 million. The company has swung from a $6 million net loss to $17 million net income. The balance sheet is excellent: Net current assets, including nut inventories of $146 million, exceed total liabilities by $37 million.

Compare that with the company’s nominal $137 million market value. Net of current assets, nuts and liabilities, it’s really only being valued at about $100 million.

Adam Strauss, co-manager of the Appleseed
APPLX, -1.57%
mutual fund, is a big investor and a fan. He explains that the company has become more proactive in recent years about marketing and focusing on the consumer. Earnings, he says, are also artificially depressed on the books as the company takes a big depreciation charge for a new facility in Illinois.

In the financial year that runs through June 2013, he believes free cash flow could hit $30 million. In relation to the company’s market value, that would be huge.

John B. Sanfilippo & Sons stock went, er, nuts during the Atkins Diet craze last decade, hitting $50 at one point. Today it’s $13. It’s come back down in recent months, after a huge run-up in the past two years. Small company stocks are volatile, of course: It just takes one or two big sellers to mark it down.

There are concerns in the nut business, like anything else. Commodity prices have been incredibly volatile in recent years. Consumers are watching their budgets these days. And raw nut prices tend to rise faster on the way up than the company can raise its own prices: The lag can squeeze margins. The company, furthermore, does not pay a dividend. The Sanfilippos own 68% of the voting stock. You’re an outsider.

Nonetheless, in a market where almost everything looks fully priced or wildly overvalued, this might be an exception.

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